Commodities · M3 · 7 min
Roll yield and commodity investing
Work out what rolling futures costs or earns, and explain why an oil fund can lose money while oil rises.
In the news: An oil fund can trail the oil price it tracks. The gap is the cost of rolling its futures.
The essentials
- Rolling
- Futures expire, so a fund that wants lasting exposure sells the expiring contract before delivery and buys the next one. That switch is a , repeated every month.
- Roll yield
- The gain or loss from rolling, as each new contract drifts towards spot. Rolling from $70.00 into $71.40 costs about 1.96%; repeated monthly with the curve unchanged, about 23.5% a year.
- Curve shape and roll yield
- In the next contract costs more, so the roll yield is negative. In it costs less, so the roll yield is positive and a long fund can beat spot.
- Three parts of the return
- A futures investor earns the spot return (the change in the price), the roll yield, and interest on the cash not needed as a deposit. Spot plus roll is the excess return.
- Why an oil fund lags oil
- Headlines quote spot, but a futures fund earns spot plus roll plus interest. If oil rises 10%, the roll costs 20% and cash earns 4%, the fund returns about −6%. Funds holding gold in a vault don’t roll.
Roll yield per roll
Roll yield ≈ (F₁ − F₂) ÷ F₂
- F₁
- price of the expiring (front) contract
- F₂
- price of the next contract
How it works
1. Funds can’t keep barrels
An investor who wants to own oil for years can’t fill a tank, so oil funds buy futures instead. But every expires. Before it does, the fund sells it and buys the next month’s contract to stay invested. That swap is called .
2. Rolling into a dearer contract
Say the expiring contract is $70.00 and the next one is $71.40. The fund sells at $70.00 and buys at $71.40, so the same money buys fewer barrels. If the curve keeps its shape, the new contract drifts down to $70.00 as it nears expiry, and the fund loses the gap.
3. Roll yield
That gain or loss is the : about (F₁ − F₂) ÷ F₂ per roll, where F₁ is the expiring contract and F₂ the next. Here, ($70.00 − $71.40) ÷ $71.40 = −1.96%. When later months cost more, a shape called , the roll yield is negative.
4. When the next contract is cheaper
When later months cost less, a shape called , each roll buys cheaper barrels, and the new contract drifts up toward spot. The roll yield is positive. With the expiring contract at $80 and the next at $78: ($80 − $78) ÷ $78 = +2.56%.
5. Small rolls add up
Funds roll every month, so a small cost repeats. A roll yield of −1.96% a month is about −1.96% × 12 = −23.5% a year if the curve keeps its shape. The oil price would have to rise that much for the fund just to break even.
6. Three parts of the return
Futures need only a deposit, so the rest of a fund’s cash earns interest. Its return has three parts: the change in the price (the spot return), the roll yield, and the interest on its cash. Total ≈ spot + roll + interest.
7. Why an oil fund can lag oil
Put it together: oil can rise 10% in a year while a futures fund loses money, if the roll costs more than 10%. Headlines quote spot; investors earn spot plus roll plus interest. Funds that hold gold itself in a vault don’t roll at all, so they don’t have this problem.
Try it
Set the curve, then read the roll: what a fund earns from swapping the front month into the next each month, if the curve doesn’t move.
Contango
Net carry r + u − y +8.00% a year
| Delivery | Price |
|---|---|
| Spot | $75.00 |
| 1 month | $75.50 |
| 2 months | $76.00 |
| 3 months | $76.50 |
| 4 months | $77.00 |
| 5 months | $77.50 |
| 6 months | $78.00 |
| 7 months | $78.50 |
| 8 months | $79.00 |
| 9 months | $79.50 |
| 10 months | $80.00 |
| 11 months | $80.50 |
| 12 months | $81.00 |
- 12-month future
- $81.00 (+8.0%)
- Roll, front to second
- −0.66% a month
- Roll, annualised
- −7.9%
- Roll plus interest on cash
- −3.9%
Worked example
An oil fund holds the front-month WTI contract at $70.00; the next month trades at $71.40. Over the month spot is unchanged, the curve keeps its shape, and the fund’s cash earns 4% a year.
- Roll yield: ($70.00 − $71.40) ÷ $71.40 = −1.96% for the month.
- Interest on cash: 4% ÷ 12 = +0.33% for the month.
- Spot didn’t move: 0%.
- Total for the month: 0% − 1.96% + 0.33% = −1.63%.
- Over a year, if the curve holds: −1.96% × 12 = −23.5% of roll, plus 4% of interest: about −19.5%.
About −1.6% in a month when oil didn’t move; kept up for a year, the curve would cost roughly a fifth of the fund.
Check yourself
7 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
Why can an oil ETF lose money while the oil price rises?
What’s roll yield?
Remember
Roll ≈ (F₁ − F₂) ÷ F₂ per roll
A futures investor earns spot plus roll plus collateral; in contango the roll is negative and can outrun the spot move.